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The new structure is vastly cleaner and the elimination of cross-holdings with improved cashfungibility is positive for the new formed entity.

According to the deal,Vedanta Aluminiumalong with theMadras Aluminium Companywillalso be consolidated into Sesa Sterlite. "Vedanta will also transfer its 38.8% holding inCairn

Indiato Sesa Sterlite. The parent company's debt will thus be lowered by 61% and Sesa Sterlitewill take on debt of $5.9 billion," said an ET report.

Vedanta's holding in the new entity Sesa Sterlite will be 58.3%, at a similar level to its 58.0%holding in Sterlite and 55.1% in Sesa currently.

Shares of Sesa Goa fell more than 10% in trade on Monday on the merger plan. According toexperts, the fall in the stock price is largely on account of swap ration and debt overhang on SesaGoa.

"Fall in the stocks is because of the swap ratio adjustment. Here, the fall is steep for Sesa Goa

because it is adjusting to the new share swap ratio," said Ashika Stock Brokers Research HeadParas Bothra.

Shareholders of Sterlite will get three shares of Sesa Goa for every five shares held, as per theswap ratio fixed. Eventually, they will become shareholders of Sesa Sterlite to be listed onbourses, after receiving regulatory approvals, including that of shareholders of the concernedcompanies.

"This said proposal will not give any capital appreciation to the investors in the short term.However, the entire merger is going to reward the shareholders after a long time because theunits to be transferred in this company say aluminium and power, both are capital intensive

industry and they have a long gestation period," said KR Choksey, Chairman, KR ChokseySecurities.

"Share swap ratio of 0.6x is fair given both past price patterns and our pre-deal fair values for thetwo companies. Based on the last closing prices of stocks, the ratio is slightly favourable forSterlite," CLSA said in a report.

According to analysts, Vedanta Resources will greatly benefit from the numerous synergies thisrestructuring would bring to the company over the years. However, shareholders of Sesa Goawill have little to cheer as the debt of the newly-formed entity Sesa Sterlite will be about 14times the current debt of Sesa Goa.

"Since the Cairn acquisition debt of US$ 5.9 billion is to move to Sesa Sterlite, Vedanta's debtservice liability would reduce 61 per cent to US$3.8bn (from US$9.7bn). As per the managementestimates, debt service cost at Vedanta Plc would fall by US$300m to US$180m in FY13. Itwould also result in a significant extension of debt maturity profile for Vedanta," said a BarclaysCapital Equity Research report.

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Brokerage Calls:

Deutsche Bank: Sesa Goa downgraded to 'Hold' by Deutsche Bank

Deutsche Bank has downgraded Sesa Goa to 'hold' from 'buy' after the restructuringannouncement and also cut target price to Rs 249 from Rs 270.

"... Transfer of the ownership of loss-making Vedanta Aluminum to the newly-created Indianentity is disappointing," the bank said in a note.

It also said swap ratio for the merger of Sterlite Industries and Sesa Goa appears favourable forSterlite shareholders.

CLSA: Upgrade Sesa Goa to underperform from 'Sell'

Our new valuation of Sesa Goa post restructuring is Rs 230, implying a value leakage ofRs15/share. The new Sesa Sterlite standalone entity should benefit from tax efficiencies acrossprofit-making iron ore/copper businesses and loss-making VAL/SEL.

We see a 9-19% EPS dilution for Sesa over FY13-14. In FY15, we see an EPS accretion of 22%as our iron ore profits fall sharply in FY15 due to lower ore prices.

We maintain 'Outperform' on Sterlite Industries with a target price at Rs138 for Sterlite, implying16% upside.

Macquaries: Buy on dips recommended for Sterlite Industries

Investors may find it tough to believe that the restructuring would not hurt minority shareholders.But our analysis does indicate undervaluation for Sterlite. In particular, we would buy on anydips.

The 12-month target price for Sterlite Industries is Rs 149.

Sesa Goa is trading at low valuations, driven by the holding company discount for its 20%holding in Cairn India. This holding company discount would narrow down under the merged

entity as the holding in Cairn India would rise to 58.5%.

Barclays Capital: Underweight on Sesa Goa

Barclays Capital is 'Under-Weight' on Sesa Goa and has a price target of Rs 176 per share.

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Vedanta Resources PLC on the Saturday announced the merger of all its key investments in India into a singlecompany called 'Sesa Sterlite'. The new holding company will own controlling stakes in all of Vedanta's companiesin India and would be a metals, mining and natural resources giant. The merg ed entity would be Indias naturalresources company and is expected to be seventh largest global diversified natural resources major on EBITDAbasis. By this exercise, the group structure has also been simplified and cross holdings have been eliminated, whichis expected to benefit the group through superior capital structure, increased flexibility to allocate capital, broaderaccess to capital markets and enhanced visibility of earnings and cash-flow. In addition to this, increaseddiversification is expected to reduce volatility of earnings through commodity cycles, lowering the cost of capitaland enhancing value. As per the management, the transaction is expected to be completed in CY12 and the synergiesare expected to generate cost savings of Rs10bn per annum.

Restructuring done to lighten up Vedanta Plc balance sheet We believe that restructuring has been done largely to lighten the parent companys balancesheet, bring in synergies between VAL and Sterlite Energy (SEL), use the accumulated losses atVAL and reduce the financing costs for the company. Vendanta Resources Plc, the parentcompany had taken loan to the tune of US$2.8bn to acquire stake in Cairn India, which was to berepaid over the next two years. In addition to this, the parent company had to infuse equity in itsloss making subsidiary VAL to fund its capex. Sterlite, 29.5% stake holder, had invested more

capital in VAL than its equity contribution over the last two years.Sterlite to witness buyingThe merger ratio would boost Sterlites stock in the near term as it is done at a premium to Fridays closing ofRs119. On the other hand, we expect it to be negative for Sesa Goa as the debt of VAL would be shared on itsbooks. We believe the deal is largely done in a fair way except the valuation of VAL. The merged company wouldbe a must own entity as it would provide a large diversified portfolio under one roof. We value the merged entitySesa Sterlite on sum-of-the-parts method. We have used EV/EBIDTA method to value the metal assets, pr ice/bookfor the power and a holding company discount to Cairn India. We derive a target price of Rs217 per share for SesaSterlite (and Sesa Goa) which on an implied basis (swap ratio of 0.6x as per deal) indicates a target price of Rs130for Sterlite. We maintain our Market Performer rating on Sesa Goa and our BUY rating on Sterlite.

Transaction completion timelinesEvents Expected date

BSE and NSE approval sought Mar-12Competition Commission approval sought Mar-12Foreign Investment Promotion Board approval sought Mar-12BSE and NSE approval Apr-12Vedanta posting of UK circular Apr-12Competition Commission approval Apr-12Application to High Court in India and Supreme Court of Mauritius Apr-12Vedanta EGM May-12Scheme documents posted to shareholders May-12Sesa / Sterlite / MALCO EGM Jun-12Foreign Investment Promotion Board approval Jun-12High Court of India and Supreme Court of Mauritius approval Sep-12Other required approvals CY 2012Transaction completion CY 2012

Source: Company

Restructuring exercise

The restructuring exercise includes merger of four companies viz Sterlite Industries, SesaGoa, Vedanta Alumina and MALCO and transfer of Vedantas stake in Cairn India to themerged entity with an associated debt. The steps for the proposed transaction are:

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1. Sterlite will merge into Sesa Goa to create Sesa Sterlite, through the issue of Sesa Goashares to shareholders of Sterlite. Sterlite shareholders as of the record date are expectedto receive 3 Sesa Goa shares for every 5 existing Sterlite shares. Sesa Goa also intends toestablish an ADS facility comparable to Sterlites current ADS. This would allow holdersof Sterlites ADS as of the record date to receive Sesa Goa ADS with appropriate

adjustments to reflect the foregoing exchange ratio. Each Sterlite ADS currentlyrepresents four equity shares of Sterlite.2. Consolidation of VAL, via the merger of Ekaterina Limited (a Mauritius holding

company for Vedantas 70.5% shareholding in VAL) into Sesa Sterlite and the issue of72.3mn Sesa Goa shares to Vedanta after obtaining all necessary approvals. Based onSesa Goas closing price on 24 Feb 12 of Rs227/share, the equity value of VAL equatesto Rs23.32bn (US$473mn).

3. MALCO to merge into Sesa Sterlite, through the issue of 78.7mn Sesa Goa shares toshareholders of MALCO as of the record date. Based on Sesa Goas closing price on on24 Feb 12 of Rs227/share the value of MALCO equates to Rs17.9bn (US$363mn)including the value of MALCOs existing 3.6% shareholding in Sterlite. As part of the

merger MALCOs existing shareholding in Sterlite will be cancelled by Sesa Sterlite.4. Post the merger of Sesa Goa and Sterlite, Sterlite Energy Limited and VALs Aluminiumbusiness will be merged into the consolidated Sesa Sterlite. As wholly-ownedsubsidiaries no shares will be issued in consideration of the mergers.

5. Vedanta will transfer its 38.8% direct shareholding in Cairn India to a wholly-ownedsubsidiary of Sesa Goa at a nominal consideration of US$1, together with the associatedacquisition debt of $5.9bn (coupon of 5.2%). The debt will continue to be guaranteed byVedanta. This transfer is not inter-conditional on the merger of Sesa, Sterlite, MALCOand VAL.

Positives of the deal:

Consolidated balance sheet to be stronger and would reduce the cost of funds for thecompanies.

Increased diversification is expected to reduce volatility of earnings through commoditycycles, lowering the cost of capital and would enhance value.

Accumulated loss of Rs15bn at VAL would reduce the tax out flow for the group. Overhang of merger of VAL with Sterlite is over. With the merger of SEL and VAL aluminium, the capex for VALs power plants would

reduce. Shareholders of Cairn India and HZL would receive higher dividend over the next two

years as the merged entity has high debt repayment. Positive for Sterlite shareholders in the near term as the deal is done at a premium to

Fridays closing price of Rs119.

Negatives of the deal:

We believe the valuation of VAL is on the higher side considering the company has beenloss making and we do not expect it to turn green over the next 1-2 years. Due to lack ofraw material integration, the cost of producing aluminium is quite high and this would

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continue until any new resource is allocated to the company. The management indicatedthat the valuation was done on a DCF basis on their assumption that they would beallocated raw material resources over the next 2-3 years. In the process of therestructuring, Sterlites inter-corporate loan of Rs10bn has not been mentioned.

We believe the merger of VAL and SEL into Sesa-Sterlite would lead to SEL supplyingpower to VALs expanded aluminium capacity. VAL is raising its aluminium smeltingcapacity from 0.5mtpa to 1.25mtpa in the next one year. We believe power required forthis would be met by SEL and would restrict the upside from its merchant powercapacity.

Consolidated entity would have to refinance its debt transferred from Vedanta, as its cashflow would be lower than the debt servicing required over the next two years. The debttaken for the acquisition of Cairn has to be repaid over the next two years and cash flowfrom operations is expected to be lower than the repayment.